U.S. markets suffered steep losses after President Trump said he would be instituting trade tariffs on steel and aluminum to elevate concerns over protectionist trade policies.

The Dow and S&P 500 closed below their 50-day moving averages to follow the small-caps lead after they closed below this technical level on Wednesday.

The Dow fell 1.7% after trading down to 24,442 while closing back below the 25,000 level for the first time in five sessions.

The S&P 500 stumbled 1.3% after testing a low of 2,659 to close below 2,700 and a level that had been holding since mid-February.

The Nasdaq tumbled 1.3% following the backtest to 7,117 and mid-February support while closing below the 7,200 level. The index held its 50-day moving average into the close after dipping below this level intraday.

The Russell 2000 slipped 0.3% after kissing an intraday low of 1,494 but held 1,500 and a level that has been holding since February 13th.

Financials were the worst performing sector after sinking 2% while Industrials and Technology down 1.7%. Utilities were the only sector that closed higher after a slight gain of 0.02%.

Global Economy – European markets were lower for third-straight session following hints the Fed could raise interest rates four times this year, instead of three times as it has previously signaled. Germany’s DAX 30 plummeted 2% while the Belgium20 and the Stoxx Europe 600 fell 1.3%.

France’s CAC 40 was off 1.1% and UK’s FTSE 100 was lower by 0.8%.

The Eurozone January unemployment rate was unchanged at a 9-year low of 8.6%, matching expectations.

The Eurozone February Markit manufacturing PMI was revised upward to 58.6 from the previously reported 58.5.

The German Markit/BME manufacturing PMI was revised higher to 60.6 from the previously reported 60.3.

Asian markets were mixed with Hong Kong’s Hang Seng up 0.7% and China’s Shanghai higher by 0.4%. Japan’s Nikkei dropped 1.6% while Australia’s S&P/ASX 200 gave back 0.7%. South Korea’s Kospi was closed for a holiday.

The China February Caixin (flash) manufacturing PMI unexpectedly rose 0.1 to a 6-month high of 51.6, topping expectations for a dip of 0.2 to 51.3.

Japan February consumer confidence fell 0.4 to a 5-month low of 44.3, weaker than expectations for a rise of 0.1 to 44.8.

Japan Q4 capital spending rose 4.3% year-over-year, stronger than expectations of 3%. Q4 capital spending ex-software rose 4.7% year-over-year, stronger than expectations of 2.7%.

Initial jobless claims dropped 10,000 to 210,000 for the week of February 24th. Personal income rose 0.4% in January, with spending up 0.2%.

PMI Manufacturing Index slipped to 55.3 in the final February reading, which compares to the 55.9 preliminary and 55.5 in January.

ISM’s manufacturing index climbed 1.7 points to 60.8 in February, which was much better than expected and represents a 14-year high.

Construction spending was flat in January after the 0.8% increase in December. Residential construction spending was up 0.2% while Nonresidential spending fell 0.1%. Private spending declined 0.5% from 0.6% while public spending rose 1.8%.

Atlanta Fed’s Q1 GDPNow estimate rebounded to 3.5%, reversing from its dip to 2.6% previously.

Market Sentiment – Federal Reserve Chairman Jay Powell said that the U.S. is not on a sustainable fiscal path and added that now is a good time to work on the country’s deficit since the economy is strong. He reiterated one of risks the Fed is trying to avoid is getting behind the curve, which would cause the FOMC to have to raise rates too quickly and cause a recession.

Powell stressed the Fed’s transparency and clarity on its normalization path are important for foreign markets, in answering a question on whether balance sheet reduction could negatively impact emerging markets, with systemic risks to financial markets globally.

Emerging markets are in a much better place than they were twenty years ago, he said, and he’s seen no obvious reactions in such markets to the Fed’s balance sheet actions.

Powell noted longer term interest rates have been rising recently and suggested the updraft is largely a function of expectations of firmer growth in the U.S., and around the world, as well as rising inflation expectations.

On labor market participation, Powell reiterated analysts are not far from the longer run trend, but the trend is not a good one. He said the participation rate has been declining for 60 years, and it’s not even at the median of comparably wealthy countries.

He went on to suggest it’s a function of prime age male workers leaving the labor force, which could be due to technology, along with the flattening out of U.S. educational attainment, the stagnation in wages, and also aging of the population.

As far as the tax bill, he said fiscal policy is one of many factors that affect the FOMC’s policy stance. He thinks fiscal policy will add meaningfully to demand and growth over the next couple of years, but it wouldn’t be the main factor.

He went on to say the bigger question is how much will fiscal stimulus add to longer run growth and repeated fiscal policy is not on a sustainable path. Powell did not view this to be a significant real term problem and said it doesn’t have a lot of impact on the FOMC’s stance.

New York Fed dove Dudley warned against raising trade barriers which would likely hurt productivity growth, since they won’t affect the trade deficit, just the trade composition.

He said that open trade benefits the supply side of the overall economy and a drop in support for liberalized trade would mean slower growth and lower living standards.

Dudley said he’s gaining confidence that rate hikes will be needed, while he considers 4 rate hikes still as gradual, though the Fed cannot be too aggressive with hikes due to below-target inflation.

He sees fiscal policy as in the process of turning quite stimulative, diminishing worries over the U.S economy, which he sees performing well over the next year or two. He views global growth as looking good, with pretty much everyone in the world growing right now.

The iShares 20+ Year Treasury Bond ETF (TLT) closed higher for a second-straight session after reaching a peak of $119.62. Fresh resistance is at $119.75-$120 with continued closes above the latter being a slightly bullish development.

Support will try to hold at $119-$118.50 with backup help at $118-$117.75.

Market Analysis – The Spider Small-Cap 600 ETF (SLY) tested a low of $129.41 to get mid-February support at $130-$129.50 back in play. A close below the latter opens up additional risk down to $128-$126 and the 200-day moving average.

Near-term resistance is at $131.50-$132.

RSI is trying to hold short-term support at 40 with a move below this level being bearish for a continued backtest towards 30. Resistance is at 50.

The Technology Select Sector Spiders (XLK) traded to a low of $66.53 intraday with mid-February support at $66.50-$66 and the 50-day moving average holding.

A close below the latter could lead to a continued backtest towards $65-$64.50. Lowered resistance is at $67.50-$68.

RSI has been in a downtrend and is trying to hold support at 50. A move below this gets 40, and possibly 30, back play depending on momentum. Resistance is at 55-60.

All the best,
Roger Scott